Why Powergrid is going for FPO ?

August 6, 2013

Powergrid Corporation acknowledged that its decision to go in for a 15% follow-on equity offering (FPO) is arguably contrary to its stance in recent investor interactions, wherein it has indicated: 1) the need for fresh equity is not envisaged in its base case business scenario, and 2) a firm decision on the issue would be taken after examining the FY15-19
regulatory returns regime to be finalized by regulator.

Investment opportunities are growing, all of which would cumulatively require a sizeable equity infusion – in the past few weeks PWGR has won a bid-based project (taking the tally to three), has inked a MoU with the Railways for a nationwide transmission / traction project, and has garnered visibility on a chunk of the ‘Green Transmission Corridor.

Unless capex plans rise exponentially from hereon, PWGR does not intend to raise equity again (at least in the medium-term) – hence the proposed FPO of 15% of paid-up capital (INR62.5bn at current market price), which would provide reasonable financial flexibility.

In our view, the reasons outlined by the management for its change in stance and decision to go in for the FPO provide comfort that funds raised would generate returns above its cost of equity (12-13%). We believe the proposed 15% FPO budgets for the Government possibly truncating the size and opting to divest 5-7% of its stake instead (given its INR400bn disinvestment target for FY14). Any divestment would bring the Government holding in PWGR to 60% (or below), arguably dissuading further divestment in the company.

Management expects to conclude the FPO within CY13, subject to the Government’s views on the quantum of issuance and its decision to simultaneously divest part of its holding in the company.